Emmanuel Macron has misdiagnosed France's ailing economy
No doubt, French labor laws are remarkably rigid and demanding. But fixing them won't actually fix the labor market. Here's why.
A few weeks ago, Emmanuel Macron won France's presidential election. Then a few days ago, his party won crushing victories in France's legislature. If he wants to fulfill his promise to bring "hope and renewed confidence" to France, Macron has his chance.
The country's economy is in the doldrums: GDP per person hasn't budged in years, nor has its unemployment rate of roughly 10 percent. Macron's solution is to cut back on France's rigid labor market laws, making it easier to hire and fire people. He's not the first French leader to attempt this, but previous efforts hit ferocious opposition from unions and labor groups.
Unfortunately, Macron's solution to France's economic woes fundamentally misdiagnoses the problem. At best it will do nothing, at worse it will intensify the country's social upheaval.
No doubt, France's labor laws are remarkably rigid and demanding compared to America's. They set payscales, overtime, and severance packages that employers must follow. Furthermore, letting a worker go is a remarkably time-consuming process. Workers can only be fired under specific circumstances (like gross negligence), and can sue for wrongful termination. Judges have a fair amount of leeway to decide what reasons past muster, and are generally seen as hostile to employers. There are also no caps on the damages judges can award workers.
So French employers often find firing people to be more trouble than it's worth. They've responded by effectively creating a two-tiered class system among workers. Some workers get the kind of job security, benefits, long-term contracts, and low unemployment levels we associate with the glory days of American manufacturing. The rest are condemned to permanent precarity: jumping from one extreme short-term contract to the next, assuming they find work at all, with no benefits to speak of. This situation hits the young in France especially hard, with unemployment rates far higher than the national average.
Macron's goal is to make France's labor market more like America's, with more churn and more freedom to hire and fire people. He also wants to increase the availability of unemployment benefits, to help workers transition from one job to the next.
But if the goal is expanding the total number of good jobs available, then Macron's proposed reforms just miss the basic economic mechanics at work here.
Fundamentally, what creates jobs is the aggregate level of demand in the economy: How many goods and services people can buy. The higher aggregate demand rises, the more jobs get created, and the more employers have to compete for workers. That forces employers to improve job offers to attract hires, expanding the availability of good benefits and security to everyone in the economy.
If France actually had genuine full employment for everyone — young and old, native and immigrant alike — and its economic growth was still stuck in neutral, then you'd have a case that rigid labor laws were to blame. But France's growth in GDP per person increased at a steady clip until 2008, and only flatlined after the Great Recession. This suggests France's problem is a straightforward shortfall in aggregate demand.
Raising aggregate demand requires getting more spending money into people's pockets. Government spending is a great way to do this, either through welfare benefits are direct public employment. At the same time, taxes take money out of people's pockets. So running large budget deficits is usually necessary to get aggregate demand up.
Another option is to just have a steeply progressive tax system, that takes most of the money from the rich. They already have more than they need, so their propensity to spend is far lower than for the rest of society.
France, unfortunately, does none of this. The eurozone's rules demand that member countries keep their budget deficits under 3 percent of GDP. Economic collapses like the Great Recession tend to blow deficits wide open, so France spent the aftermath of 2008 massively shrinking its deficit — from about 7 percent of GDP to 3 percent — and thus sucking money out of its economy. The eurozone's taskmasters are pressuring Macron to stick to the 3 percent ceiling, and he's pledged to oblige with a smattering of spending cuts, particularly to France's civil service.
At the same time, France's tax system is actually less progressive than America's, so they don't do as good a job shifting the money to where it can do the most good for job creation.
Finally, the eurozone's utterly daft monetary policy — which has prioritized tight money and low inflation, at the expense of job creation throughout the currency union — hasn't made things any better.
America made many of the same policy mistakes after 2008, fixating on low inflation and austerity. (Though overall we did quite a bit better than Europe.) And in both countries, these choices make some amount of joblessness and worker precarity inevitable. France and America's differing approaches to labor market regulation just meant they distribute that pain in different ways.
So if Macron successfully pushes his labor reforms through, what will most likely happen is a shift to an America-like situation: France's young people will be better off, but its prime-age workers worse off. That might cut down on radicalization among France's younger immigrant population. But throwing France's prime age workers under the bus would also likely help far-right nationalist movements like Marine Le Pen's gain power. And overall unemployment wouldn't really change compared to what would've happened had Macron's reforms failed to pass.
Conversely, if Macron confronted the eurozone and either forced the currency union to reform or got France out from under its rules, he could expand the deficit and jumpstart stimulative spending. Macron would have plenty of options: France's schools need much more investment, especially in poor areas, for instance. And public transit needs an upgrade, while the French working class needs more assistance to be able to afford it. As aggregate demand increased and French employers ran out of available workers, they'd be forced to offer everyone a better deal regardless of whether the labor laws change.
The whole problem right now is that, outside of the core group of privileged French workers, the unemployed vastly outnumber job opportunities. So French employers can be picky and unilaterally set the terms of employment, no matter how absurd their demands.